The markets have changed since the 1960s, with the weekly
trading volumes of those days often exceeded by a single day of trading
now. With that in mind, can classic techniques such as Darvas-style trading
still work?

Nicholas Darvas was a Hungarian-born
dancer who successfully traded the market in the early 1960s. His book,
How I Made Two Million Dollars In The Stock Market, is a classic.
It describes a unique approach to understanding the nature of trend behavior.
The Darvas trading style uses trend analysis based entirely on dynamic
support and resistance concepts. It is a complete and standalone trading
approach. It is not combined with straight-edge trendlines, or with moving
averages, or with the Guppy multiple moving average, or any other indicator.

WHY DARVAS?

Darvas trading defines an uptrend by constructing a series of imaginary
boxes based on a price chart. Each box contains a set of price moves. Each
new box sits on top of the previous box like a set of rising stairs. When
price moves above the upper edge of the box, it means the continuation
of a trend is confirmed. The trend ends when prices close below the bottom
of the current box. These upper and lower limits create a Darvas box and
define the acceptable bullish and bearish range of prices.

For several years, this approach was tested in current markets with
real trades and modifications consistent with the logic of the Darvas method,
but taking into account changes in volatility that characterize modern
markets. These included applications to breakout trading using a different
set of initiating triggers while applying the basic method.

The Darvas trading technique provides a useful way to manage longer-term
trending positions. It is designed as a method of capturing the strength
of the trend. The buy signals are generated on new bullish strength, managed
by using the six-day volatility range to set a stop-loss. The limits of
this strength and weakness set the perimeters of the Darvas box (D_Box).
The bottom of the box is used as a stop-loss point. Ideally, the box construction
moves steadily upward with the trend, with a trailing stop-loss lagging
just behind current price action (Figure 1).

FIGURE 1: IDEAL DARVAS BOX TREND TRACKING. In an ideal
scenario, the construction of the boxes moves steadily upward with the
trend. The bottom of the most recent Darvas box serves as the stop-loss
level.

...Continued in the May issue of Technical Analysis of STOCKS
& COMMODITIES